Question

On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You plan to sell your shares on December 21, 2021 and are concerned about downside risk. A put option on ABC stock with an exercise price (K) of $40 is currently priced (P) at $2 per share. Also, two call options on ABC stock with exercise prices (K) of $40 and $65 are priced (C) at $2.5 and $1.50 per share, respectively. All options expire on December 21, 2021. What will be net profit/loss per share on a short call (use K=$65 call) if the stock price is $10 per share?

Answer 1

Exercise Price of Call Option = $65
Stock Price Today = $10
Premium received on call option of exercise price 65 = $1.50

Since stock price is less than exercise price, call option expires out of the money and payoff will be 0.

Profit per share from short call option = Premium Received on call option - Payoff from call option C-
                                                  = $1.50